Case gives clarity on the incorporation of standard terms. Credit: 3D Animation Production Company, Pixabay

Chief economists warn of economic nationalism casting a long shadow over trade prospects

By Carly Fields

 

Today’s global economic landscape is defined by an unprecedented level of volatility and uncertainty, a sentiment echoed by leading chief economists in the World Economic Forum's (WEF) latest Chief Economists Outlook report. 

Far from a fleeting disruption, the prevailing view among 79% of surveyed economists is that current developments signal a "long-term structural shift" in the global economy, a significant increase from 61% in late 2024. This shift, driven largely by escalating geopolitical tensions and a resurgence of economic nationalism, casts a long shadow over trade prospects, threatening to redefine the “key pillars of the post-World War II international economic order”.

The report highlights how recent swings in US trade policy have been a primary catalyst for this uncertainty. A dramatic announcement in early April of increased import tariffs, including a 10% baseline on most global goods, triggered immediate "financial market convulsions". While a subsequent 90-day pause on most of these tariffs offered a temporary reprieve, the underlying fragility remains palpable. "The post-pause outlook remains uncertain, and the volatility of decision-making has triggered questions about the continuing reliability and predictability of economic policy in the US," the report said.

Trade-related uncertainty in the past three months has reached levels unseen since 1960, surpassing even the peaks observed during the COVID-19 pandemic, said the report.

“Policymakers and business leaders must respond to heightened uncertainty and trade tensions with greater co-ordination, strategic agility and investment in the growth potential of transformative technologies like artificial intelligence,” said Saadia Zahidi, managing director of the World Economic Forum. “These steps are essential for navigating today’s economic headwinds and securing long-term resilience and growth.”

 

Trade ramifications

The implications for global trade are stark. A total of 77% of chief economists anticipate that higher tariffs will lead to increased inflation, and an even larger majority, 89%, foresee a "stagnation or decline for global trade volumes". This forecast is corroborated by the World Trade Organization (WTO), which projects a 0.2% contraction in global merchandise trade volumes this year due to the threatened tariffs. 

While a majority (53%) of economists believe the economic damage from a potential trade war would primarily impact the US and targeted countries, a significant 32% warn of "a broader drag on the global economy". Strikingly, "none expected the tariffs to have no economic damage". 

Echoing the downbeat chief economists, the OECD Economic Outlook, Volume 2025 Issue 1, issued June 3, also downgraded growth projections. “We are now forecasting that global growth will decline from 3.3% in 2024 to a modest 2.9% in 2025 and in 2026,” said OECD chief economist Álvaro Pereira. “Weakened economic prospects will be felt around the world, with almost no exception. Lower growth and less trade will hit incomes and slow job growth.” 

While the OECD report still forecasts that inflation will come down to central bank targets by 2026 in most countries, it will now take longer to reach those targets.

“In the countries more affected by tariffs, inflation might even rise first before coming down,” Pereira said.

Risks have also risen significantly: “There is the risk that protectionism and trade policy uncertainty will increase even further and that additional trade barriers might be introduced,” he added. According to OECD simulations, additional tariffs would further reduce global growth prospects and fuel inflation, “dampening global growth even more”.

 

Polarisation impact

Beyond trade, political polarisation and economic nationalism are identified as increasingly potent drivers of economic outcomes by the WEF. A near unanimous 95% of those surveyed for the Chief Economists Outlook expect political polarisation to result in "further suboptimal economic decision-making this year". Furthermore, 98% of chief economists predict an acceleration in the pace of "geoeconomic fragmentation" as trade and investment flows increasingly align along geopolitical fault lines.

Regionally, the outlook is varied but generally subdued. North America, particularly Mexico and Canada, remains highly susceptible to shifts in US economic policy due to deep trade integration. The US itself faces a softening growth trajectory, with almost four out of five chief economists anticipating "weak (69%) or very weak (8%) growth for the remainder of the year". This contrasts sharply with earlier, more optimistic projections and is accompanied by expectations of higher inflation and a weakening dollar.

Europe, while still navigating a weak base, shows nascent signs of improvement, driven by an anticipated "expansionary shift in fiscal policy". Germany's dramatic overhaul of its fiscal framework, including a relaxation of debt constraints for infrastructure and defence spending, is seen by half of the surveyed economists as a catalyst for "an acceleration of growth across the continent". The European Central Bank's continued monetary easing also offers support, with inflation expected to remain moderate or low.

In Asia, China's ambitious 5% GDP growth target for 2025 faces considerable headwinds, with only a third of economists confident it will be achieved.

Despite a temporary de-escalation of US-China trade tensions, significant tariffs remain in place. Deflationary risks persist, leading 69% of respondents to expect "low or very low inflation this year". The wider East Asia and Pacific region confronts slowing global trade and geopolitical tensions, with most economists expecting moderate or weak growth.

Latin America and the Caribbean brace for weak growth (55% expectation) amid tight global financial conditions, slowing demand, and persistent geopolitical tensions. 

In the Middle East and North Africa, chief economists are divided on growth, with fluctuating oil prices adding to fiscal pressures in oil-exporting economies. Sub-Saharan Africa, however, presents a "cautiously optimistic" growth outlook, with a majority expecting moderate or strong growth, though challenges like infrastructure needs and food insecurity persist. 

Finally, South Asia emerges as a bright spot, with robust growth prospects despite regional tensions, particularly driven by India's economic engine.